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Introduction to Audit | What is Audit ?

An Intro to audit

An Introduction to Audit | What is Audit ?

What is Audit: An audit is an objective examination and evaluation of the financial statements of an organization to make sure that the records are a fair and accurate representation of the transactions they claim to represent. It can be done internally by employees of the organization, or externally by an outside firm.

 

Audit is an Independent Examination of the Financial Statements of an entity irrespective of its size and legal status, with a view to express Opinion thereon.

We have discussed about what are the financial statements in an large entity in our previous blog. If you haven’t visit, you can visit now by click here.

Auditing is a means of evaluating the effectiveness of a company’s internal controls. Maintaining an effective system of internal controls is vital for achieving a company’s business objectives, obtaining reliable financial reporting on its operations, preventing fraud and misappropriation of its assets, and minimizing its cost of capital. Both internal and independent auditors contribute to a company’s audit system in different but important ways.

The basic objective of an audit is to ensure that the financial statements of an entity show true and fair view or not. There are other objectives as well such as Assessment of Risk, Detection of Material misstatement and Frauds and errors.

There are many categories of audits performed – income audit; night audit; system audit; safety audit; compliance audit; environmental audit; process audit etc. However, from experience, they are broadly categorized as External Audit and Internal Audit. While the latter focuses on the procedures to ensure that the financial statements of the company are not materially misstated, the Internal Audit looks beyond numbers and focuses on processes; regulations; compliance etc. Of course, the Internal Audit function can also be outsourced and many would argue that it is also called External Audit, but the nature of Internal Audit is to check the internal processes within the company, which is necessary for the Audit Committee and Shareholders to know.

I Benefits of External Audit:

1 Directors (particularly Non-executive Directors)

  • Adherence to Corporations Law obligations
  • Better corporate governance issues
  • Better integrity of the relied upon internally prepared financial information
  • Better financial risk management issues including adequacy of internal controls, solvency, etc
  • An external perspective of the business independent of day-to-day management

2 Management

  • Reliable financial information – better management decisions
  • Improved management of the financial risks of business
  • Stronger internal financial discipline
  • A supplement to the internal finance team skill set
  • External assessment of accounting policies – improved financial performance reporting

3 Owners/Shareholders

  • Reliable financial information to assess management’s performance
  • An external perspective of the business independent of day-to-day management

4 Investors

  • Reliable financial information – more ‘lend worthy’
  • Improved credibility of covenant reporting
  • Prospective Purchasers
  • Stronger internal control systems – increased business value
  • Reduced risk in acquisition due diligence

II Benefits of Internal Audit:

  • Helping protect assets and reduce the possibility of fraud
  • Improving efficiency in operations
  • Increasing financial reliability and integrity
  • Ensuring compliance with laws and statutory regulations
  • Establishing monitoring procedures
  • The scope of the internal audit is defined by management or the Board (not an outside agency or adversarial entity)
  • Internal Audit “reports” directly to management or the Board (not an outside agency or adversarial entity)
  • Improves the “control environment” of the organization
  • Makes the organization process-dependent instead of person-dependent
  • Identifies redundancies in operational and control procedures and provides recommendations to improve the efficiency and effectiveness of procedures
  • Serves as an Early Warning System, enabling deficiencies to be identified and remediated on a timely basis (i.e. prior to external, regulatory or compliance audits)

Hence it ultimately increases accountability within the organization.

You can also read our previous posts:

1. WHAT IS GOODS AND SERVICE TAX.

2. LIST OF SERVICES EXEMPTED UNDER GST.

AUDIT AS A CAREER now days; become very vast as every entity has a mandatory requirement of auditing in making their business successful. In other words, there is a high demand of auditors in the business market. Chartered Accountants considered as an expert of Auditing are highly appointed for the area of audit.

There are many more concepts related to field of audit, we will discuss them detail in our next post, such as Standards on Auditing, Audit in a specific areas etc.

If you want to share your views, feel free to mail us at info@itslyf.com

-Geetika Goyal (Team Itslyf)

What is Audit ?

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